Argentina faces creditors in court

Argentina squared off with a group of US hedge funds in a court case that has the potential to unravel its deals over the past decade to emerge from a $100bn (€76bn) pile of bad national debt.

The high-stakes legal fight in New York, which revolves around Argentina’s refusal to pay anything to a small group of hold-out creditors owed about 1.3bn (€994m), appeared to be reaching a sort of brink as lawyers representing banks, bondholders, and the republic appeared before the 2nd US Circuit Court of Appeals.

The intractable nature of the dispute was made clear from the start, when Argentina’s American lawyer, Jonathan Blackman, sheepishly issued what amounted to a challenge to the court’s authority. He said that if the judges issued a ruling that did not go Argentina’s way, the country would simply refuse to comply.

“We are representing a government, and governments will not be told to do things that fundamentally violate their principles,” Mr Blackman said.

The pronouncement visibly irritated one of the judges on the panel, Reena Raggi, who questioned the lawyer sharply about why that meant the court should excuse the country from a debt that it is legally obligated to pay.

The dispute stems from Argentina’s record 100 billion-dollar default on its national debt in 2001. Most of the country’s creditors ultimately agreed to new bonds paying far less than what they were originally owed. A few hold-outs resisted, including companies controlled by New York billionaire hedge fund investor Paul Singer.

Those hold-outs have won a 1.3 billion-dollar court judgment against Argentina in New York, but have been labelled “vultures” by Argentina’s president Cristina Fernandez, who has vowed to pay them nothing unless they accept the same deal as the other bondholders.

Mr Singer’s hedge funds, meanwhile, have gone after Argentina’s assets around the world, even temporarily persuading Ghana to seize an Argentinian navy ship.

The two sides have been in court over the issue since 2004, but yesterday their argument before the 2nd US Circuit Court of Appeals was being watched closely by bankers because of its potential impact on unrelated debt disputes.

In a creative effort to force Argentina to pay up, a federal judge last year ordered the US bank processing the country’s debt payments to begin diverting a portion of that money away from the bondholders who previously settled and into the hands of Mr Singer and the other hold-outs.

The idea, hatched by US District Judge Thomas Griesa, was to make it impossible for Argentina to settle any of its debts without also paying the hedge funds, thus putting it under more pressure to abide by the court’s judgments.

That solution, though, raised cries of protest from banks, bondholders and from the US Treasury Department. They argued that Judge Griesa’s solution unfairly penalised bondholders who were not a party to the dispute.

They also warned that, if copied in other cases, the solution of garnishing payments made through custodial banks could inject an element of uncertainty into an electronic funds transfer system vital to the world economy. Right now, money transfers on that system are virtually automatic.

The two groups of bondholders were represented in court yesterday by Theodore Olson and David Boies, the same lawyers who represented George Bush and Al Gore in their Supreme Court showdown over the 2000 presidential election.

Mr Boies, who represents the group of bondholders whose payments would be disrupted under Judge Griesa’s plan, said it was unfair for the court to punish them in an attempt to force Argentina to obey the court order.

Mr Olson, who represents Mr Singer’s NML Capital, dismissed the idea that the other bondholders were innocent victims or that the court was overstepping its bounds.

“The hostage holding is being done by Argentina,” he said. He said Argentina owed the money, had the ability to pay, and should not be rewarded for its defiance.

“Argentina would be vastly better off,” he said, “if it started to pay its obligations.”

If the court upholds Judge Griesa’s orders, it might set up a scenario where Argentina would either have to begin paying the hold-outs or default on all of its restructured debts – a move that could create a new economic crisis.

Mr Blackman said Argentina would probably opt to default anyway. “You’re going to make it worse,” he warned the judges.

The appeal court is not expected to issue a ruling for several months.